Tenant Estoppel Certificates: A Preparation Checklist for Buyers
When a buyer purchases a property with existing leases, the buyer is purchasing the income stream represented by the leases, and is also assuming the landlord’s obligations under the leases. So it is critical that the buyer know what it is getting into in order to protect its investment in the income, and to ensure a peaceful and productive ongoing relationship with the tenants. The best way for a buyer to know what it is getting into is to obtain a well-prepared tenant estoppel certificates, a checklist for which is provided below.
A well-prepared and properly executed estoppel enables the buyer to (i) confirm that the lease documents provided by the seller are accurate, complete and not missing any amendments, (ii) learn about claims by tenants concerning defaults or disputes, (iii) clarify ambiguities and questions raised during the buyer’s review of the lease and due diligence documents, and (iv) prevail in any dispute where a tenant makes a claim after the closing that is contrary to the facts stated in the estoppel.
Estoppel Certificate Preparation Checklist for Buyers:
1. Before estoppel certificates are prepared, review the lease documents obtained from the seller, and compare them against the rent roll and other due diligence documents. It is not uncommon for lease terms to be ambiguous or confusing, especially where there is a succession of amendments, and some imperfect drafting along the way. Also, a comparison of the lease against the rent roll and other due diligence documents may reveal discrepancies between these documents and the lease. Sometimes, the buyer’s concerns about such ambiguities and discrepancies are adequately addressed by the seller providing additional information. At other times, it is best for the buyer to seek clarification directly from the tenants by including clarifications in the estoppel certificates.
2. Buyer should seek to prepare the estoppel certificates to ensure completeness and clarity. Generally, buyers attach a comprehensive form of estoppel certificate as an exhibit to the Purchase Agreement for use in the transaction. However, too frequently, estoppel certificate preparation is left to the seller, seller’s staff, or the tenant, who may simply “fill in the blanks” and overlook important lease terms, resulting in incomplete or ambiguous estoppel certificates. When prepared by the buyer, however, the estoppel certificate can be tailored to the specifics of the lease, and can provide an opportunity, as discussed above, to clarify lease ambiguities identified by the buyer during its due diligence review.
3. Attach a complete copy of the lease to the estoppel certificate before it is executed by the tenant. Often, a seller will obtain an estoppel certificate from a tenant without a copy of the lease attached as an exhibit at the time the tenant executes the certificate. Subsequently, the seller attaches to the certificate what seller believes to be a true and complete copy of the lease. Under those circumstances, the tenant may be able to claim the existence of other lease amendments, reflecting terms other than what the buyer is relying on, a result that can frustrate the purpose of obtaining the estoppel. The tenant is barred from claiming the existence of other lease terms only where the complete lease agreement is attached to and incorporated in the estoppel certificate when and as signed by the tenant.
4. Circulate the estoppel certificate for tenant signature in secure electronic form. To help ensure that a tenant is executing and delivering the estoppel certificate as it was prepared, with the complete current lease agreement attached as an exhibit at the time of tenant signature, employ two simple technical tools: (i) create a password-protected pdf file of the final form of estoppel certificate, including lease exhibits, that can be printed but not modified; and (ii) on each page of the certificate and all attached exhibits, add a footer that identifies the tenant’s name, the page number, and the total number of pages in the complete estoppel document (along the lines of “[Tenant name] Estoppel Certificate: Page __ of __”) so that it is easy to confirm that the complete estoppel document has been signed by the tenant as it was prepared and submitted to the tenant for signature. This procedure still allows tenants to insert additional information in the estoppel by hand.
5. Be sure the terms set forth in the estoppel certificate are affirmed by all lease guarantors. Particularly where the tenant under a lease is a limited liability company or other entity, a landlord (and the buyer) may be ultimately relying on guarantors, such as individual members of an LLC tenant, for performance of the rental and other lease obligations. In those circumstances, each guarantor should be required to execute a guarantor estoppel to certify the truth, accuracy and completeness of the tenant’s certifications, and to certify that the guarantor’s guarantee obligations remain in full force and effect without offsets or defenses.
If you have any questions or comments, email Rick.